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AOL Accelerates Revenue And Adjusted OIBDA Growth

AOL Inc. (NYSE:AOL) released second quarter 2014 results today.

“AOL's future as a scaled media technology company continues to get stronger,” said Tim Armstrong, AOL Chairman and CEO. “AOL grew consumer usage, video, programmatic advertising, branded content, and ad pricing throughout the first half of 2014, and we will continue to make AOL one of the best operating companies in our industry.”
Summary Results
In millions (except per share amounts)
Q2 2014   Q2 2013   Change
Global advertising and other $ 451.7 $ 375.3 20 %
AOL Properties Display 144.1 146.2 -1 %
AOL Properties Search 98.9 93.7 6 %
Third Party Platform 194.3 121.3 60 %
Other 14.4 14.1 2 %
Subscription   155.1   166.0 -7 %
Total revenues $ 606.8 $ 541.3 12 %
Adjusted operating income before depreciation and amortization (Adjusted OIBDA) (1) $ 121.5 $ 108.3 12 %
Operating income $ 54.0 $ 51.9 4 %
Net income attributable to AOL Inc. $ 28.2 $ 28.5 -1 %
Diluted EPS $ 0.34 $ 0.35 -3 %
Cash provided by operating activities $ 125.9 $ 89.4 41 %
Free Cash Flow (1)     $ 87.5   $ 57.3   53 %

(1) See Page 9 for a reconciliation of Adjusted OIBDA and Free Cash Flow to the GAAP financial measures we consider most comparable.

Q2 Consolidated AOL Revenue Trends:
  • Q2 total revenue grew 12% year-over-year, driven by accelerated global advertising revenue growth.
  • Global advertising revenue grew 20% year-over-year reflecting:
    • 60% growth in Third Party Platform revenue driven by growth in the sale of premium formats across AOL’s programmatic platform and by the inclusion of revenue from Third Party Platform Revenue grew approximately 20% excluding
    • 1% decline in AOL Properties display revenue, due to the absence in Q2’14 of approximately $15 million in revenue from shuttered or de-emphasized brands, including the disposition of Patch. Excluding these impacts, display grew 9% driven by improved overall inventory pricing.
    • 6% growth in AOL Properties search revenue driven by increased queries from search marketing related efforts (which came with approximately $18 million of increased Traffic Acquisition Costs (TAC)).
  • Subscription revenue declined 7% year-over-year as 4% growth in average monthly subscription revenue per AOL subscriber (ARPU) partially offset a 9% decline in subscribers. Domestic AOL subscriber monthly average churn was 1.6% in Q2 2014 compared to 1.4% monthly average churn in Q2 2013, primarily reflecting a price increase during the quarter.

Q2 Consolidated AOL Profitability Trends:
  • Cost of revenues increased $58 million year-over-year, due to a $63 million increase in TAC, reflecting the inclusion of, search marketing related efforts and growth in Third Party Platform revenue. Excluding TAC, cost of revenues declined $5 million primarily due to lower headcount, including the declines related to the disposition of Patch.
  • General and administrative expenses grew $3 million in Q2 2014 from Q2 2013, which included a $6 million benefit from a favorable settlement. Excluding this benefit in the prior year period, general and administrative expenses declined in Q2 2014, reflecting lower marketing and personnel expenses.
  • Adjusted OIBDA grew 12% year-over-year, driven by total revenue growth net of TAC and reduced non-TAC operating expenses.
  • Operating Income, Net Income and Diluted EPS were negatively impacted by a $7.4 million year-over-year increase in amortization of intangible assets and by a $7.2 million year-over-year increase in stock-based compensation expense, resulting from acquisitions made late in 2013 and in the first half of 2014.

AOL Asset, Cash & Cash Flow Trends:
  • AOL had $136 million of cash and equivalents and $105 million of outstanding borrowings under our $250 million senior secured revolving credit facility agreement at June 30, 2014.
  • On July 30, AOL completed the sale of its Dulles Technology Center (DTC) for approximately $33 million. The DTC is classified as held for sale on the balance sheet at June 30, 2014. On August 4, AOL repaid $30 million of borrowings under the Credit Facility Agreement, leaving a balance of $75 million on outstanding borrowings.
  • Q2 cash provided by operating activities was $126 million and Free Cash Flow was $88 million, both up approximately $30 million year-over-year, primarily reflecting the receipt of a significant payment from a large partner during the quarter, whereas the prior year payment was received in Q1.
  • AOL repurchased 1.6 million shares of common stock at an average price of $36.84 in Q2, or approximately $59 million in aggregate. On July 28, AOL’s Board of Directors authorized a $150 million share repurchase. Repurchases may be made under the authorization until July 28, 2015.

  Q2'14     Q2'13       Change    
    (In millions)      
Brand Group   185.7   190.3 -2 %
Membership Group 203.8 213.8 -5 %
AOL Platforms 247.1 160.4 54 %
Corporate & Other 0.0 0.3 -100 %
Intersegment eliminations         (29.8 )           (23.5 )       -27 %    
Total Revenues     $   606.8         $   541.3         12 %    
Adjusted OIBDA
Brand Group 13.1 (1.4 ) N/A
Membership Group 143.4 151.6 -5 %
AOL Platforms (5.0 ) (11.3 ) 56 %
Corporate & Other         (30.0 )           (30.6 )       2 %    
Total Adjusted OIBDA     $   121.5         $   108.3         12 %    

Brand Group

Brand Group revenue declined year-over-year, negatively impacted by the absence of display revenue from shuttered and de-emphasized brands, including Patch. Excluding this impact, Brand Group display revenue grew 4%, driven by continued growth in inventory pricing. Brand Group search revenue grew 10% year-over-year, driven by increased queries from search marketing related efforts.

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